Evolving U.S. Inflation Dynamics: Explanations and Investment Implications

19 Pages Posted: 11 Oct 2007 Last revised: 5 Nov 2007

Date Written: September 2007


Inflation is a fundamental macroeconomic risk factor for a broad range of asset classes. Since the 1980s, global inflation has generally trended lower and inflation shocks have become less persistent despite, at times, considerable commodity-price volatility. Will this lower inflation trend persist in the face of potential secular inflationary forces? In this paper, we document the evolving dynamics of the U.S. inflation process. We attribute the profound changes in U.S. inflation persistence to more effective and credible monetary policy, rather than from "globalization" or other structural changes in the economy. Our empirical analysis implies that a low and more stable inflation environment is highly likely to persist going forward, conditional on appropriate monetary policy. We then discuss the potential implications for future short-term interest rates, long-duration bonds, and inflation-hedging instruments.

Keywords: Inflation dynamics, inflation persistence, monetary policy, globalization, interest rates

JEL Classification: E31, E5

Suggested Citation

Davis, Joseph H., Evolving U.S. Inflation Dynamics: Explanations and Investment Implications (September 2007). Available at SSRN: https://ssrn.com/abstract=1019239 or http://dx.doi.org/10.2139/ssrn.1019239

Joseph H. Davis (Contact Author)

The Vanguard Group ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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